Liquor Updates: Wholesale Pricing

My phone was ringing off the hook prior to and after the announcement by Suzanne Anton and the GM for the BC Liquor Distribution Branch. The biggest, and really only, question is ‘What does this mean?’

There is a ton to talk about as the announcement involved Grocery Stores, Wholesale Pricing, Separation of LDB Retail from Wholesale, perhaps the item that will have the most short and long term impact is Wholesale Pricing.

Wholesale Pricing

Current System

Currently BC Liquor Stores do not purchase product from the Wholesale division of the BCLDB. They simply order it, it arrives and they retail it. Private stores do pay LDB Wholesale for their product. The price is a function of the BC Liquor Store retail price. In other words a discounted retail price is what private stores pay. The discount is based on the license type. Licensed Retail Stores (LRS) receive a 16% discount off retail, while Private Wine Stores (Everything Wine, Marquis, etc.) receive at 30% discount on import wine, 15% on domestic wine and cider and are prevented from retailing beer or spirits. Rural Agency Stores (RAS) receive a 12% but are not allowed to carry anything but BC Liquor Store skus. These stores are usually in small rural communities.

Wholesale System

As of April 1, 2015 a new pricing model will be adopted that will apply to all liquor retailers in the province. The price will be a true wholesale price and not a discount from BC Liquor Store retail. As of this writing it appears that pricing will be a function of product type and not be a flat tax as it is in Alberta. What this means is that there will not be a standard price. All retailers, including BC Liquor Stores, will have the choice to retail at any price they choose.

Key Omissions

The new wholesale pricing structure will not be afforded to on-premise (restaurants, hotels, bars) accounts. On-premise accounts will continue to pay full retail and only from BC Liquor Stores or domestic suppliers.

Private Wine Stores will not be allowed to add beer, spirits or coolers to their selection, but will pay the same price for all their products as all other retailers. In other words they are losing a 14% product cost advantage over LRS stores without gaining product options. I would guess that this might change between now and April 1.

At present BC Liquor Stores can solicit advertising, or co-op dollars from suppliers, whereas it is illegal for private stores to do the same. If we are talking about a true level playing field, what’s good for the goose should be good for the gander.

In the current system when a supplier reduces their price, the supplier ‘buys down’ all the inventory on-hand and incoming for BC Liquor Stores for the duration of the price reduction. It is illegal for suppliers to buy down inventory at private stores. Once again, what’s good for the goose…

Speculative Listings: Under the current system BC Liquor Stores are forbidden from putting ‘Spec Listings’ on their shelves. This was done to offset the huge discrepancy in cost of goods between BC Liquor Stores and private stores and give private stores a ‘selection’ edge. Presumably under a wholesale system, speculative listings will be scrapped.

Impact: Consumer Pricing

With all retailers paying the same price for goods it will likely encourage greater competition which, for the consumer, could mean greater selection, although I’m not certain this will be come to pass, but it will likely mean greater price variation, competition and, I believe that this will be in the form of price agility.

At present BC Liquor Store can only change their prices once per month. Private stores can change their prices daily and thus be far more strategic about the timing and value of sale pricing. There are hundreds of shelves in business schools filled with thousands of books and papers dedicated to pricing strategy- agility is the winner hands down. With this in mind I suggest that everyday prices will remain relatively the same, however BC Liquor Stores are likely to start doing ‘one-day’ or ‘this weekend only’ sales which will trigger a market wide long-term response.

It is well known that British Columbians pay the highest prices in Canada and these changes ensure that this will continue. The structure will continue to be ad-volerum vs flat tax (see below for definitions of each) which means that low end products are price favoured while premium priced items are penalized. Alberta is a flat tax and that is why a product priced $70 will likely only be $50 in Alberta.

Addendum Nov. 27: We now know the graduated mark-up schedule in totality. Consumers will not likely see any differences in wine under $20 or spirits under $30, however for those that purchase at the premium end of the scale, the new model promises significant price hikes the value of which increases as the price of the product increases.

Impact: Selection

The argument was made during the announcements that overall selection would be improved. I have doubts that this will happen unless you consider 3 new sizes of Budweiser or brand extensions of Copper Moon and positive increase in selection.

Above I mentioned the doing away with Speculative listings. If this is the case, then you will likely see a plethora of new items on the shelves in BC Liquor Stores, however overall provincial selection will not likely change that much.

Addendum Nov. 27: The graduated mark-up schedule will likely negatively impact the selection of premium wines and spirits in BC. Price hikes on premium wine and spirits will significantly slow sales, meaning that importers and suppliers are likely to redirect offerings to other markets where sales are likely to be better.

Definitions

Ad-Volerum: An ad-volerum tax system is one that adds a percentage tax to the cost of goods instead of a consistent dollar value. In the new system that starts April 1, 2015 the tax on wine will start at 89% (there will be graduated values on premium and super premium wines). 89% on a wine that starts at $3 a bottle has means the government receives $2.67 in tax. 89% mark-up on a wine that starts at $6 is $5.34. In this simple calculation (prior to PST, GST, Volume mark-ups, etc.) a wine that starts at $3 would retail at $5.67/bottle whereas the $6 bottle would retail at $11.34/bottle; a difference of $8.67 which only $3 is found in the product cost.

Flat Tax: A flat tax is consistent dollar value applied to every bottle no matter the value of the bottle. In a flat tax system, the only price difference between a $3 bottle and $6 bottle is $3 as the tax value is the same for each bottle. For example in a system with a flat tax of $2/bottle the $3 bottle would retail at $5 and the $6 bottle would retail at $8.

Attached is the pdf outlining the new wholesale pricing model as issued by the BCLDB.

I’m sorry to say but it is likely to get worse than better. From what I have been able to ascertain, premium products are likely to see a price increase under the new system, while entry level items will remain the same.
Let me ask you this if I may, would you prefer and reduction in the cost of the Tequila by $40 but an increase in your everyday wine, beer or spirit $1?

I wouldn’t necessarily care about raised “minimum prices”. Most of the bottom shelf products that the BC system favors are basically meant to inebriate people and do little else, and as far as I am aware, the taxes are meant to offset the costs of medical assistance that alcohol abuse incurs.

Thus, it makes basically no sense that fine wine and spirit drinkers are being punished while recreational booze remains attainable by joe average. Though, I’m preaching (more like ranting) to the choir, so… :S

There was a hidden part of the announcement that mentioned that mark-ups were also going to reflect alcohol percentage, which could mean ‘recreational’ booze, as you put it, could be singled out for increases.